A company is a separate legal entity that has the same legal capacity as an individual, such as signing contracts. However, unlike individuals, companies can only enter contracts through the actions of its operators, such as directors or company secretaries. If they do not follow the specific procedures, the contract may not be enforceable. Therefore, companies must ensure they are aware of the processes required to sign contracts that are valid. This article explains three ways for a company to validly sign a contract.

1. Signature of Directors and Company Secretaries

Companies usually execute agreements through the signatures of its directors and secretaries. 

Under the Corporations Act, a company has validly signed the contract if the signatures come from:

  1. two directors of a company;
  2. one director and one company secretary; or
  3. the sole director who is also the company secretary, for proprietary companies only.

Proprietary companies are privately owned companies that do not offer their shares on the stock exchange.

If the company does not follow any of the three methods when signing a contract, then the contract is not validly executed.

If you are signing as a director or company secretary, your signatures will appear at the end of the contract on an execution block. 

2. Common Seal 

Companies can also sign contracts by stamping the company’s common seal on the contract. The seal usually contains the company’s Australian Company Number (ACN) and the company’s registered name.

Large companies may use a common seal if signing major contracts or contracts with overseas parties. Otherwise, the use of a common seal in everyday contracts is uncommon.

A valid signature by common seal happens when the seal is applied and is witnessed by:

  1. two directors of a company;
  2. one director and one company secretary; or
  3. the sole director who is also the company secretary, for proprietary companies only.

Company Constitution

A company can set rules on how to execute a document through the company’s constitution. Your company constitution can echo the rules set out in the Corporations Act for signing with or without a common seal. Alternatively, you can vary the rules to suit your business needs. 

For example, if you are the sole director but not the company secretary, you can set out in the constitution that you can sign on behalf of the company.

You can also use the constitution to provide for agents or representatives who can sign on behalf of the company. This arrangement is useful for large companies who have a large volume of transactions where it would not be practicable for a director or company secretary to sign off on every transaction.

Whoever you appoint as a company agent or representative must have the required authority to sign on behalf of the company. You can provide for this authority through a board resolution. Otherwise, a registered power of attorney provides transparency as to who has the authority to make decisions for the company.

A power of attorney is a legal document that allows someone (in this case, a director of a company) to appoint someone who can make decisions for them on their behalf.

If your agent or representative has the authority, they must sign in front of a witness.

The Importance of Valid Signing

If a company signs a contract using one of the above methods, outsiders can assume that that the contract has been signed validly. The implication is that companies must ensure that the people who have signed on its behalf have the proper authority. Otherwise, the company will not be able to escape its legal obligations under the contract.

On the other hand, the other party to the contract may argue the contract is unenforceable as your company did not correctly sign off the contract. You would waste time and money trying to argue your case that the contract remains enforceable. Therefore, you may want to consider how your company can implement a proper process to manage contract signing.

For example, if you are a director of a large company, you may consider how to appropriately delegate authority to others to sign contracts on behalf of your company. You may want to consider:

  • how many people should have this authority;
  • what type of contracts they can sign off on your company’s behalf; and
  • how many people are required to sign off on the contract.

Key Takeaways

A company must follow specific procedures through the Corporations Act or its company constitution to validly sign contracts. If they do not follow those procedures, their contracts may not be enforceable. Therefore, you must ensure all directors, company secretaries or any other person within your company are aware of the correct procedure to sign off on contracts. If you have any questions, get in touch with LegalVision’s contracts lawyers today on 1300 544 755 or fill out the form on this page.

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